After surviving record lows in 2015/2016, the coal mining industry appears to be experiencing a renaissance in the Q1/2018, with coal miners enjoying their best returns, as strong Asian demand and tight supplies are sending prices up.
As reported by Reuters, Chinese thermal coal futures had hit record 687 yuan (AU$108.49), up five-fold on their 2016 slump. Coal cargo prices from Australia’s Newcastle terminal have also roughly doubled in the same period to over AU$100 per tonne, closely resembling their 2011/2012 high.
In an atmosphere where the spotlight has been firmly focused on clean energy production – especially LNG – and investors shunning coal due to concerns and pressure over its negative environmental impact, the rise in coal prices has taken many by surprise.
AMCI Group Managing Director Brian Beem affirmed that outlook for high grade thermal coal and steelmaking coal was positive.
“The urbanisation and electrification of Asia will continue to drive demand for these commodities, and we see supply struggling to meet that demand because of depletion and lack of investment in new capacity,” Beem said in emailed comments to Reuters.
ENERGY HUNGRY ASIA BUOYS COAL
At the epicentre of this strong resurgence is Asia’s continued thirst for thermal coal. In spite the rise of LNG and renewables, consumption of coal across Asia has barely dropped.
Thomson Reuters Eikon trade data shows that shipments to North and South Asia’s main energy consumers, which make up half of the world’s population, have not dropped since 2016, unlike commodities such as LNG.
The top coal and LNG consumer – Japan – imported a record of 114.5 million tonnes of coal in 2017, a rise of 4.3%. That same year, LNG imports rose only by 0.4% to 83.8 million tonnes.
China’s thirst for energy continues to outpace all of its counterparts, with the country’s coal imports in 2017 at record highs not seen since 2014 – a big 270.9 million tonnes.
Overall, Asia’s share of the global coal consumption increased from less than 50% in 2000 to almost 74% in 2016.
Price growth is clearly on the horizon in 2018, but some analysts warn that the coal mining industry is on shaky ground. Basically, what goes up, must come down … again.
It cannot be denied, nor ignored, that the future of power generation is looking green, with an impetus for cleaner technology such as gas, solar, wind, and even Energy from Waste (EfW) picking up pace across the globe.
China itself is intensifying its war on smog and pollution, with a push to boost cleaner energy consumption and limit the use of coal. Enter stage right: the country’s huge gasification program, which aims to move millions of households and the Chinese industry from coal to gas.
The future is unclear, at best.
Even the world’s second largest mining company, Rio Tinto, is shedding its coal operations in Australia, selling its final Australian coal asset – the Kestrel underground coal mine in central Queensland – for AU$2.9 billion. This followed the sale of the Hail Creek coal mine and two other coal development projects in Queensland.
South32, the Perth-based miner spun out of BHP Billiton, is also in the process of selling its thermal coal assets in South Africa.
Then there’s Adani – the Indian energy giant – that cannot get a foothold in Australia to develop its Carmichael coal mine in northern Queensland due to mounting and ongoing opposition, not only from the Australian population and the environmental movement, but now also from Australian political parties.
It seems that coal miners are adopting one of two disparate strategies, either exit the business in a highly visible way or sit tight and keep as quiet as possible.
|Thermal coal prices have jumped in 2016. Image source: Thomson Reuters Eikon|
GREENING AND INNOVATION– A MATTER OF SURVIVAL
The coal industry and its operations have for many years worn the moniker of being environmentally unsound and a “filthy” industry. A moniker that seems to cast a deeper shadow on the sector more so now, than ever before.
Continued global pressure from environmental groups as well as local communities where mining operations are based, not to mention a not so perfect environmental track record over the decades, has made many major investors uneasy with being associated – financially or otherwise – with the industry.
Late last year, Australia’s “Big Four” banks – Commonwealth Bank of Australia (CBA), National Australia Bank (NAB), ANZ, and Westpac – have announced that they would not finance the Adani project.
NAB was the first Australian bank to develop a formal policy to stop financing new coal mining projects, citing that the move was borne of the bank’s recognition that it has “an important role to play in the orderly transition to a low-carbon economy”.
According to NAB’s Sustainability Report 2017, 5% of its A$12.5 billion spending on the resources sector went to coal mining.
These pressures are forcing coal mining companies to rethink and design operations that are aligned with environmental practices, as well as being economically viable in the current market.
|Coal consumption and production in 2016 per region. Source: BP Statistical Review of World Energy 2017|
The mining industry has traditionally been a dawdler when it comes to innovation, yet, innovation is integral to the performance of the mining industry. It is a global and highly competitive sector, and as such companies that are slower to create or adapt to new products and processes – including new technologies – risk fewer growth opportunities and lower returns.
A study conducted by Deloitte in association with Diggers and Dealers, and the Association of Mining and Exploration Companies (AMEC), found that five main areas drove innovation within various mining companies: reduction to operational costs; improved asset productivity; risk reduction; safety; and cost reduction in asset development.
Yet, a disconnect between acknowledging the need to innovate and the actual follow through to act on this imperative in a systemic way is quite large.
One of the reasons for this is the industry’s conservative nature and the culture of being a “fast follower”. With mining being an inherently risky venture, from ore body uncertainty to volatility of commodity prices, certain companies are reluctant to take on additional risks associated with innovation, especially if it could impact cash flow or their licence to operate.
Innovation, however, will be a key to survival as miners face challenging environments – both physical and socio-political. Diversity of thinking will be essential to creating the steady stream of innovations needed not only to deliver the next wave of growth and productivity, but also to build sustainable business models over the long run. This will require collaboration with each other and external partners to aid in the development of low-risk and cost-effective solutions. Collaboration, however, for many companies raises fears and concerns of jeopardising the security of intellectual property. But, coal mining companies can no longer afford to go it alone.
Albeit not a coal mining operation, advances in tailings management and water recycling are supporting Goldcorp’s Towards Zero Water initiative, which will lead the industry to dramatically lower water consumption over the next decade and completely eliminate the use of traditional slurry tailings, currently the largest store of unavailable water in the mining process.
Goldcorp has successfully implemented filtered tailings at its El Sauzal mine, the Marlin mine, and most recently at its Éléonore mine. The Marlin mine employees demonstrated ingenuity, suggesting a first-for-Guatemala, or anywhere in Central America: instead of hauling the material to a conventional tailings storage facility, they proposed that the open pit could be refilled with its own filtered, compacted tailings.
Canada’s recently announced CLEER (Clean, Low-energy, Effective, Engaged and Remediated) proposal was shortlisted by the Canadian government to receive funding from its Innovation Superclusters Initiative.
The CLEER supercluster, comprised of a 162-member consortium, aims to transform the mining sector’s productivity, performance, and competitiveness through tackling global challenges of water, energy, and environmental footprint, with bold targets of a 50% reduction in each area by 2027. CLEER will engage the mining services and supply sector (MSS) and mining companies.
Although unsuccessful in receiving funding from the Canadian government, Adrian McFadden, Chair of the CLEER Interim Board said that while CLEER was disappointed in the final outcome, it remained firmly committed to mining innovation and working towards building up this significant initiative.
“The process of developing the CLEER initiative was a turning point for our sector. It sparked an enthusiastic response from Canada’s mining and mining supply industries and involved an unprecedented level of collaboration on innovation in our sector.”
“We believe that innovation is an important catalyst to Canada becoming the leading supplier of sustainably-sourced minerals and metals and clean-tech solutions the world needs. Moving forward, Canada’s mining industry will be seeking new opportunities to be a partner to government to achieve shared goals through innovation,” stated Pierre Gratton, President and CEO, the Mining Association of Canada.
|Goldcorp’s Marlin mine in Guatemala, backfill of former pit. Image source: Goldcorp|
New technologies are enabling workers to make quicker, more informed decisions at the front lines of operations. Advancements in artificial intelligence and machine learning are giving geologists more options and the data to understand existing deposits differently, along with tools to make new discoveries. Increased automation is removing workers from the riskiest parts of the mine, making mines safer as operators strive for zero harm.
As technology enables mining professionals to improve the output, ultimately creating a safer work environment, companies will require workforce with the relevant skills to build and maintain the digital infrastructure that supports new, modern mines. Expertise in artificial intelligence, virtual reality, software design and systems integration will bring a fresh perspective on what it means to be a miner.
As with innovation, mining companies will be unable to achieve this transformation on their own. Cross-sector collaboration is essential to ensure the efficient use of resources and expertise.
According to a report by Deloitte, constituting approximately 30% of total cash operating costs, energy is one of the biggest expenses for mining companies.
With renewable energy fast-becoming an alternative energy source, mining companies have a material opportunity to use renewables to lower costs, improve safety, reliability and sustainability, and mitigate risks to ultimately gain a competitive advantage. Investment in an effective energy management program, of which renewables are a major component, can drive down energy costs by up to 25% in existing operations and 50% in new mines.
Even though energy management practices are becoming more accepted by the sector, there is still resistance from some to integrate renewable energy sources and enabling technologies into their energy management programs. This may be due to perceptions about where renewables stand today in terms of complexity, cost, reliability, and performance.
Realising the full benefits from renewables involves more than installing a solar array or wind turbines, it requires a willingness to rethink operational processes and to reconsider the way work is done.
Renewables have reached a position where they should be examined as part of a broader social and environmental agenda in addition to their financial proposition as a replacement for traditional fuel sources at mine sites. By offering important social, health and safety, and environmental benefits, they create shareholder value.
To realise the fullness of these opportunities, mining companies will need to challenge their capital projects groups and their design teams to take a hard look at renewable technologies, not just as a pure substitute for existing energy sources, but also as a means of doing things differently.
“No matter how they go about it, companies seeking to address the triple bottom-line of social, environmental and financial value owe it to their stakeholders to consider integrating renewables into their energy management strategies,” said Marlene Motyka, Deloitte’s Global Renewable Energy Lead Partner. “The clean-energy movement is global, it is industry-agnostic, and it is irreversible,” she added.
COAL MINING AUSTRALIA
In a most recent trade data report, the Australian Bureau of Statistics (ABS) has announced that Australia’s coal export values have hit a new peak of $56.5 billion in 2017.
This valuation is 35% higher than 2016 data, and beats the previous record of $46.7 billion, set in 2011, by nearly $10 billion.
The $56.5 billion is split between 200 million tonnes (Mt) of thermal coal valued at $20.8 billion, and 172Mt of coking coal valued at $35.7 billion.
According to Minerals Council of Australia Executive Director, Coal, Greg Evans, growth in key Asian markets for high-quality Australian coal will continue to underpin Australia’s coal exports with increasing demand forecast over the medium term.
Australia’s comparative advantage in minerals and energy exports is not simply a function of its natural endowments. Rather, this comparative advantage has to be achieved by productive firms that are prepared to bear the risks of investing, employing and innovating to derive market value from mineral resources.
Australia’s mining industry is increasingly focused on integrating new technology and ideas into its operations.
|Summary of Bowen-Surat region, one of Australia’s richest coal deposits. Source: Deloitte Access Economics (2017)|
THE BOWEN AND SURAT BASINS
The Bowen and Surat basins are located in central and south-west Queensland. Bowen basin contains Australia’s largest coal reserves (especially high quality metallurgical coal), with almost all of Queensland’s operating coal mines in 2014-15 being located in the Bowen basin. Due to this abundance of coking coal, Queensland has become the world’s largest exporter of seaborne-traded metallurgical coal, exporting upwards of 68 million tonnes of metallurgical and thermal coal (TMR, 2016).
According to the Annual Bulletin of Mining and Geology: Mongolia 2016, the mining sector continues to be the main pillar of economic growth and development in Mongolia. As stated in the report, the mining sector in recent years has contributed to approximately 20% of the GDP, approximately 60% to the industrial output and about 80% of total exports.
As reported by Mongolia’s National Statistics Office, coal exports dropped by nearly a quarter in January from a year earlier, to 1.995 million tonnes, with a drop in value of 18.45% at $138 million.
With 90% of Mongolia’s total January exports destined for China, deliveries disrupted by ongoing bottlenecks at the border with China that stretched 100 kilometres into the Gobi Desert, forced Mongolia to suspend coal deliveries to clear the key supply route.
According to industry sources based in Ulaanbaatar, Chinese drivers were protesting against the Mongolian authorities’ increased enforcement of rules requiring drivers to pay Mongolian taxes and social insurance in order to receive permits to deliver coal.
Even though the road is now operational, companies have been issued quotas to restrict the number of trucks allowed to use it. The government also plans to open a new route for coal trade to reduce congestion.